Authorities have witnessed a surge in healthcare expenditure in recent years in Japan, where costs of prescription drugs are reimbursed by the government under the Public Health Insurance System (PHIS). For the 2015 fiscal year, the MHLW reported a 3.8% increase in overall medical expenditure, which reached JPY41.46 trillion (US$340 billion) compared to JPY 39.96 trillion (US$330 billion) in 2014. Cost of prescription drugs accounted for just over 20%, or JPY7.9 trillion (US$65 billion) of overall health expenditure, and increased in FY2015 compared to the previous year. This had a significant impact on the state’s health budget and triggered a discussion on drug price revisions.

The drug pricing system in Japan is strictly regulated by various health authorities such as the Drug Pricing Organization (DPO), Ministry of Health, Labor and Welfare (MHLW) and Central Health Insurance Medical Council (Chuikyo). The general procedure followed involves the DPO consulting the MHLW to determine drug prices for new products, with final approval by Chuikyo. Prices determined are valid for a period of 2 years and will be subsequently revised biennially.

In order to contain prices of so-called huge-seller drugs, in April 2016, Chuikyo approved a re-pricing rule to revise NHI drug prices. Under this special pricing rule, authorities can lower the price of the drug by 25% if it generates annual sales between JPY100 to 150 billion (US$0.8 to 1.3 billion) at NHI prices by exceeding the company’s initial sales forecast by 50%. Further, prices may be reduced by 50% for sales more than JPY150 billion (US$1.3 billion) that exceed initial sales forecasts by 30%. This has resulted in abrupt price reduction of blockbuster drugs such as Harvoni and Sovaldi, each by 31.7%, Avastin by 10.9% and Plavix by 28.8% in April 2016, and 50% for Opdivo in November 2016.

Price cuts of high-cost prescription drugs with increased sales prompted a further proposal to reform Japan’s drug pricing policy in December 2016, with Prime Minister Shinzo Abe directing the nation’s Council on Economic and Fiscal Policy (CEFP) to draft a reform. Early discussions suggest that, starting from 2018, the government is considering expanding annual price revisions to all prescription drugs. Also, there is a blueprint in place approved by the Council of Ministers to conduct off-time price reviews on a case-by-case basis, if there is a significant difference in the price of the drug set by the government and its wholesale price. Further, the government also intends to conduct quarterly price revisions for drugs with sales significantly exceeding their initial estimates or that receive approval for additional indications (such as multi-indication drugs).

The Japanese government justifies its price reductions of high-cost prescription drugs as a means of increasing medication affordability and aiding in a sustainable PHIS. However, these actions have been met with severe criticism from domestic (JPMA) and international (PhRMA and BIO) pharma trade groups. Companies fear that abrupt price cut decisions will have an immediate effect on their stock market standing as their shares stumble and a general increase in frequency of price revisions will also have a significant impact on their yearly revenues.

Price revisions could also deter the interest of pharma companies to invest in R&D, which will hinder the development of innovative medicines. Further, changes of this nature can lead companies to perceive the market to be less predictable and unstable, as it poses a risk for their investment returns, thereby potentially discouraging them from launching new products in the country. This would result in a delay in market access for novel drugs in Japan and patients having to wait will be forced to buy counterfeit medicines, which again is a risk for patients’ health.

The ideal way for the health authorities to deal with drug pricing policy reform is to take holistic and balanced decisions taking into account industry sentiments. For example, this would entail measures for appropriate drug prescription and patients’ eligibility to receive medications to reduce health costs and most importantly inclusion of sound pharmacoeconomic analysis in evaluation of drug reimbursement. Government should also consider the possibility of entering into various managed entry agreements (MEAs) with pharma companies, which include cost and risk sharing agreements. In cost-sharing agreements (price-volume agreements, budget caps and quantity limits) and risk-sharing agreements (outcome or money-back guarantees, payment by results and conditional treatment continuation), both the stakeholders (payers and companies) share the cost and outcome risk associated with the innovative products respectively. An approach along these lines would better take into account both the need to reduce costs and the importance of doing so sensibly.


This blog is part of a series of posts from DRG’s global market access team examining challenges facing pharmaceutical firms in different countries in 2017. See our other blogs as they are added here (

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